The Wrong Way to Fix Student Debt

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Betsy DeVos, the education secretary, has given banks more leeway to charge borrowers high fees if they fall behind.CreditCreditStephen Crowley/The New York Times

By Susan Dynarski

May 6, 2017

Tens of millions of Americans together owe more than a trillion dollars in student debt. For the financial health of their households and the entire economy, ensuring a fair and smoothly functioning student loan system is critically important.

But with a series of regulatory changes, the Trump administration is taking us in the wrong direction, making student loans riskier, more expensive and more burdensome for borrowers.

First, the Education Department has weakened accountability for the companies that administer student loans. Second, it has made it more difficult for borrowers to apply for, and stay enrolled in, income-based payment plans. Third, Betsy DeVos, the education secretary, has given banks more leeway to charge borrowers high fees — as much as 16 percent of the balance owed — if they fall behind.

Less Accountability for Loan Companies

Federal Student Aid, the agency within the Education Department that oversees student loans, outsources loan servicing to private companies. The largest of them is Navient, formerly a part of Sallie Mae. Companies like Navient are the face of the student loan system, and often the source of enormous frustration for borrowers. The Consumer Financial Protection Bureau has documented thousands of cases in which loan companies have misdirected payments, lost paperwork and charged the wrong interest rate on loans.

Federal Student Aid allocates business to contractors based on their collection performance, using outcome-based metrics like the default rate on the loans they handle. But the agency did not consider whether a contractor had engaged in illegal behavior until the Obama administration directed it to do so.

The Consumer Financial Protection Bureau has protested this turnabout, stating that borrowers deserve to be protected from illegal actions.

When government regulation stifles innovation, it should be pared back. That is not the case here. Borrowers can’t vote with their dollars by shifting their loans to a company that provides better service. Rather, they are locked in with the contractor assigned to them by the Education Department; if the government does not monitor these companies, borrowers are at risk.

Harder to Apply to Programs

Income-based repayment plans allow borrowers to pay what they can afford by setting their payments as a percentage of their income. Expanding access to these plans, which are intended to reduce borrower distress and default, was a priority of the Obama administration.

These programs require borrowers to document their income, using information from the Internal Revenue Service. The complexity of this part of the application process has frequently tripped up borrowers, keeping them from enrolling and remaining in income-based plans.

The I.R.S. Data Retrieval Tool, established in 2009, enabled borrowers to direct their tax data to loan servicers. This eased the process of applying for both income-based repayment and completing the Free Application for Student Aid (known as the Fafsa), which is the gateway to federal and state aid.

But on March 3, the Trump administration took down the online Data Retrieval Tool, after the I.R.S. found that it was being used to file fraudulent tax returns. Securing the confidential data of taxpayers is undeniably important. But the administration disabled the tool with no initial announcement from the I.R.S. or the Education Department, leaving applicants floundering.

After a week, the agencies jointly released a statement explaining what they had done, and in late March, announced that the tool would remain out of commission until at least October.

The tool not only made life easier for borrowers and applicants, but it also reduced mistaken payments by the Education Department. The Government Accountability Office cited the I.R.S. tool as an example for other agencies seeking to reduce improper payments.

Higher Fees in Store

Access to income-based repayment programs is more important than ever because of a separate Trump administration rollback of protections for borrowers. Now, those who fall behind on their payments are subject to much larger penalties.

The Obama administration had limited the ability of loan companies to impose punitive fees on borrowers who were in default. Before the Obama rules went into effect, borrowers could be required to pay back as much as 16 percent of their loan balance before they were allowed to enroll in an income-based program. On March 16, Ms. DeVos issued a directive that allows loan companies to again charge these fees.

If the Education Department fails to protect and assist borrowers, where can they turn for help? During the Obama administration, other agencies stepped in to monitor the behavior of the loan servicers and banks. The Consumer Financial Protection Bureau, in particular, appointed a student loan “czar,” who has collected thousands of complaints from borrowers and has published an annual report on student loans.

In a recent letter, a group of academics urged that the consumer bureau go further by collecting loan-level data on repayment, delinquency and default just as it does in monitoring the mortgage industry. I have suggested the same, in a previous column.

The Trump administration and Republicans in Congress have made the consumer bureau a target. They aim to strip the agency of its oversight authority and independence. As it stands now, the Federal Reserve funds the consumer bureau, which buffers it from political pressure. If the bureau is hamstrung, borrowers will have lost a powerful watchdog.

It is puzzling that Ms. DeVos has consistently said that government should be held accountable for the quality of the services it delivers to students, yet the Education Department has in short order made loan companies less accountable to both the government and to borrowers.

This is unfortunate. Dismantling the regulation of loan companies isn’t likely to unleash an innovative, private market that will improve services for borrowers, who have been assigned to a loan company and can’t shift to a better one. There is therefore no market discipline that will drive the bad companies out of business.

Deregulation, in this case, simply leaves borrowers at the mercy of an unaccountable corporate bureaucracy.

Susan M. Dynarski is a professor of education, public policy and economics at the University of Michigan. Follow her on Twitter at @dynarski.

A version of this article appears in print on , on Page BU4 of the New York edition with the headline: A Trillion-Dollar Student Debt, With Mounting Risks. Order Reprints | Today’s Paper | Subscribe